European equities finished their session in the red yesterday, perhaps due to the weaker-than-expected growth data from China. However, risk appetite improved during the US session and rolled over into the Asian session today, probably as earnings from big US banks last week sparked optimism for the rest of the season.
As for tomorrow, during the early European morning, the UK CPIs for September are due to be released, where elevated rates could increase possibility of a Bank of England (BoE) hike before year-end.
EU Stocks Slide On Chinese Slowdown, US Indices Rebound on Earnings Optimism
The US dollar underperformed against all the other major currencies on Monday and during the Asian session Tuesday. It fell the most against NZD, AUD, and EUR in that order, while it lost the slightest ground against JPY.
The strengthening of the risk-linked Kiwi and Aussie, combined with the weakening of the dollar and the yen, suggests that market participants had an increased appetite for risk.
Looking at the performance in the equity world, we see that European shares closed in the red, perhaps as investors were still concerned after the weaker-than-expected growth data from China.
Oil prices hit fresh highs, denting sentiment during the EU session, reigniting higher inflation concerns. However, the picture was different during the US session. Although the Dow Jones slid 0.10%, the S&P 500 and the NASDAQ finished their trading positive, with an upbeat appetite infecting the Asian session today.
Last week, better-than-expected earnings results from big US banks encouraged some market participants to start this week by increasing their risk exposure. This is a sign that they may have become slightly optimistic for the rest of the season.
Analysts expect the S&P 500 earnings to rise 32% from a year ago. With several major indices around the globe breaking key technical resistance zones last week, we believe that more positive results could encourage more stock buying.
At the same time, risk-linked currencies are likely to benefit, while the safe havens may stay on the back foot. However, as we noted last week, we are reluctant to call for a long-lasting recovery.
We prefer to take things step by step because the fundamental background that triggered the latest correction in equities has not changed much. Oil prices remain elevated, leading to higher inflation and faster tightening by major central banks.
At the same time, China faces several problems, from default risks in the property sector to tight regulations for tech firms and new lockdown measures due to the spreading of the Delta variant.
Speaking about central banks, during the Asian session today, the Reserve Bank of Australia (RBA) released the minutes from its latest monetary policy meeting, but there were no fireworks as we had been expecting.
Just for the record, the minutes confirmed that officials do not want to raise interest rates before 2024, noting that tighter monetary policy would lead unacceptably to fewer jobs and lower wage growth.
During the early European morning, the nation's CPI data for September comes out. The headline CPI rate could hold steady at +3.2% YoY, while the core rate could tick down to +3.0% YoY from +3.1%.
Despite the potential slowdown in underlying inflation, both rates could stay well above the Bank of England's (BoE) objective of 2%. Thus, if the forecasts are met, we doubt it could alter market expectations around the BoE's future policy plans.
With BoE Governor Andrew Bailey and MPC member Michael Saunders expressing willingness to push the hike button soon, market participants anticipate a 15 bps hike before year-end.
However, despite the latest rally in the pound, we will be more and more careful as we climb higher. In other words, we will continue aiming north, but we are reluctant to predict a healthy, long-lasting uptrend.
We don't see much room for hike expectations because of concerning headlines surrounding the UK economy. We may get a clearer idea from the preliminary PMIs for October, which are due on Friday.
S&P 500 - Technical Outlook
The S&P 500 cash index rebounded yesterday after it hit support at 4445, and now it is trading within the resistance zone between the 4483 and 4494 barriers, marked by Sept. 27 and 13, respectively.
Overall, following the break above the downside line drawn from the high of Sept. 6, the index continues to climb higher, which paints a positive short-term picture in our view.
We believe that a break above 4494 could encourage advances towards the 4530 zone, marked by the high of Sept. 9, the break of which may allow a test near the index's record peak of 4550, hit on Sept. 3.
If market participants are not willing to stop there either, then a break higher would take the index into uncharted territory and may see scope for advances towards the psychological zone of 4600.
If the price turns south and falls back below 4375, marked by the inside swing high of Oct. 12, we will abandon the bullish case. This could signal the return below the downside line and target the 4330 zone, which provided support on Oct. 12 and 13.
If the bears do not stop there, the next support may be the low of Oct. 6 at 4284.
GBP/USD - Technical Outlook
Yesterday, the GBP/USD pair rebounded from the 1.3708 level, and is currently trading slightly above Friday's high of 1.3774. Overall, the pair continues to print higher highs and higher lows above the upside support line drawn from the low of Sept 30. We maintain a positive stance for now.
We believe that the break above 1.3774 may have opened the way towards the high of Sept. 17. A break of which may allow a test of Sept. 15's peak at 1.3854.
If the bulls are unwilling to stop there, then a break higher could set the stage for advances towards the peak of Sept. 14, at 1.3913.
On the downside, a break below the 1.3675 zone and the upside support line may be a short-term trend reversal signal.
In our view, this could encourage the bears to charge towards 1.3575, which acted as a support on Oct. 12 and 13. Breaking through that would pave the way towards the low of Oct. 4, at 1.3532.
Elsewhere
The only data releases worth mentioning are the US building permits and housing starts for September, as well as the API report on crude oil inventories for last week.
Building permits are expected to decline slightly, while housing starts are forecast to increase fractionally. As is always the case, no forecast is available for the API number.
As for the speakers, we have eight officials on the agenda. We will hear from the European Central Bank (ECB) from Chief Economist Philip Lane and Executive Board members Frank Elderson and Fabio Panetta.
While from the BoE, Governor Andrew Bailey will step up to the rostrum. In the US, San Francisco Fed President Mary Daly, Atlanta Fed President Raphael Bostic, Fed Board Governor Michelle Bowman, and Fed Board Governor Christopher Waller are due to speak.